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In the realm of contract law, the concept of a Continuing Guarantee holds significant importance. It serves as a vital mechanism to provide assurance and financial security in a wide range of transactions.

A Continuing Guarantee extends beyond a single transaction, encompassing a series of ongoing obligations between the Creditor and the Principal Debtor. This contractual arrangement involves a Surety who assumes liability for the debts and obligations of the Principal Debtor.

What is Continuing Guarantee?

In accordance with Section 129 of the Indian Contract Act, 1972, when a contract of guarantee extends to a series of transactions or multiple obligations, it is referred to as a “Continuing Guarantee”. These guarantees have a specific time limit or duration, such as one month or one year. 

A Continuing Guarantee does not terminate after the discharge of a single promise or repayment of a single debt or transaction. The Surety, who provides the guarantee, has the ability to limit their liability in terms of time or amount according to their preferences and interests. Under Continuing Liability, the Surety remains liable for any unpaid balance or remaining debt at the end of the guarantee.

There are two types of Continuing Guarantees: Prospective and Retrospective. Prospective guarantees are given for future debts, while retrospective guarantees are given for existing debts.

To illustrate the concept of a Continuing Guarantee, let’s consider the following examples:

  • T promises Y to be responsible for the collection and payment of rents by G, who is employed by Y to collect rent for Y’s zamindari. T guarantees up to Rs. 50,000 for this collection and payment. This arrangement constitutes a Continuing Guarantee Contract.
  • T guarantees payment to Y for ten sacks of wheat to be delivered by Y to G. The payment is to be made within a month. Y delivers ten sacks and G pays for them. Later, Y delivers eight sacks to G, but G fails to make the payment for those sacks. In this case, the guarantee provided by T was not a continuing guarantee and therefore, T is not liable for the price of the eight sacks.

According to Section 6 of the Indian Contract Act, 1972, a “Contract of Guarantee” is a type of contract that involves the performance of a promise, discharge of liability and dealing with breaches by a third party in case of default. A guarantee can be either oral or written. 

A Contract of Guarantee involves three parties: the Surety, who gives the guarantee; the Principal Debtor, in whose default the guarantee is given; and the Principle Creditor, to whom the guarantee is provided.

For instance, let’s say T enters into a contract with Y to deliver 10 liters of orange juice daily. However, this contract is valid only if G acts as a surety, taking responsibility for the payment in case Y fails to pay for the orange juice. If Y does not fulfill their payment obligation to T, G will be required to make the necessary payment as the surety.

Difference Between Specific and Continuing Guarantee 

There are two types of Contract of Guarantee:

Specific Guarantee: This type of guarantee is provided for a specific transaction or debt. For instance, let’s consider a scenario where A borrows Rs. 1 lakh from Yes Bank and C provides a guarantee for the repayment of the loan. In this case, C’s liability ends as soon as A repays the loan amount to Yes Bank.

Continuing Guarantee: This type of guarantee extends beyond a single transaction. For example, let’s say A guarantees payment to B, a coffee dealer, for any coffee supplied to C from time to time, up to the amount of Rs. 10,000. Initially, B supplies coffee to C worth more than Rs. 10,000 and C pays B accordingly. Later, B supplies coffee worth Rs. 20,000 to C, but C fails to make the payment. Since the guarantee given by A was a continuing guarantee, A is liable to B for the amount of Rs. 10,000.

Here is a table highlighting the differences between Specific Guarantee and Continuing Guarantee:

AspectSpecific GuaranteeContinuing Guarantee
ScopeApplies to a specific transaction or debtApplies to a series and multitude of transactions
DurationLimited to a single transaction or debtExtends beyond a single transaction or debt
TerminationEnds upon the completion or discharge of the specific debtContinues even after the discharge of a single debt or transaction
LiabilityLimited to the specific transaction or debtExtends to future transactions or debts until revoked
Notice of RevocationCan be revoked by giving noticeCan be revoked by giving notice or by specific time limitations
Application of Surety’s LiabilitySurety’s liability is limited to the specific transaction or debtSurety’s liability is co-extensive with that of the Principal Debtor
ExampleA guarantees repayment of a loan taken by B from CA guarantees payment for any coffee supplied by B to C

Nature of Continuing Guarantee Contract

The concept of a Continuing Guarantee is characterised by its application to a series of distinct and separate transactions. Therefore, when a guarantee encompasses an entire consideration, it cannot be classified as a continuing guarantee.

In the Nottingham Hide Co vs. Bottrill case, it was emphasised that the determination of whether a guarantee is a continuing guarantee or not depends on the specific facts, circumstances and intentions of each case. If the contracts are entered into based on misrepresentation or fraud by the creditor, involving material circumstances or the concealment of important facts, the contract will be deemed invalid and void.

Once the guarantor fulfils their liability by paying the debt to the creditor, they assume the position of the creditor and obtain all the rights that the creditor had over the principal debtor. All transactions entered into by the principal debtor until they are revoked by the guarantor shall be subject to the continuing guarantee. A guarantee for future transactions can be cancelled at any time by notifying the debtors. However, for transactions entered into before the cancellation of the guarantee, the liability of the guarantor cannot be reduced.

Liability of the Surety Continuing Guarantee

The principle of a Surety’s liability is outlined in Section 128 of the Indian Contract Act, 1972, which specifies that the Surety’s liability is co-extensive with that of the Principal Debtor, unless otherwise stipulated in the contract. The Surety remains liable for transactions conducted between the Creditor and the Principal Debtor. 

This means that the Surety is responsible for any amount that may become due from the ongoing dealings or transactions between the Creditor and the Principal Debtor.

The Surety’s liability can be discharged when they revoke their guarantee. It is important to note that the Surety’s liability is secondary to the contract, meaning that if the Principal Debtor is not held liable, the Surety will also not be held liable.

Different Modes of Revocation Continuing Guarantee Contract

Mode of RevocationDescription
Notice of RevocationThe Surety gives a notice to revoke the guarantee
Expiry of Specified TimeThe guarantee automatically revokes upon reaching the specified time limit mentioned in the contract
Mutual AgreementBoth the Surety and the Creditor agree to revoke the guarantee through mutual consent
Death of the SuretyThe guarantee is revoked upon the death of the Surety
Variations in ContractChanges and amendments made to the terms and conditions of the contract without the consent of the Surety

By giving a Notice 

Notice of revocation by the Surety does not cancel or revoke the liability for a transaction that is already in progress. It only applies to future transactions. The Surety cannot simply waive or revoke its liability by giving notice. If the contract of guarantee includes a specified time duration that must be fulfilled before the contract can be revoked or cancelled, the Surety cannot escape its liabilities.

In the case of Offord v. Davies, the Surety had guaranteed the repayment of bills to be discounted by the Creditor for the Debtor, up to the amount of $600, for a period of one year. Even though the Surety had revoked their guarantee before any bill was discounted, the Creditor continued to discount the bills. When the Debtor defaulted on payment, it was held that the Surety was not liable for the bills discounted after the revocation of the guarantee.

On the death of the Surety 

When the Surety dies, a contract of continuing guarantee is terminated and it is automatically revoked for future transactions. However, the Surety’s heirs can still be held liable for transactions made prior to the Surety’s death. If the contract of guarantee explicitly states that the Surety’s property, legal representatives, heirs or agents will be responsible and liable for any obligations or breaches even after the Surety’s death, it would contradict the meaning of Section 131 of the Indian Contract Act, 1972 and the guarantee would not be revoked upon the Surety’s death.

In the case of Durga Priya Chowdhury v. Durga Pada Roy, the Surety provided a guarantee for the collection and payment of rent for the Creditor’s Zamindari by the Principal Debtor. After the Surety’s death, the Principal Debtor defaulted and the Creditor sued the Principal Debtor and the Surety’s legal representatives. The court held that the guarantee was not revoked by the Surety’s death, as the provisions stated that the Surety’s heirs would be bound and liable just like the Surety.

Changes made in the terms and conditions of the contract without the Surety’s Consent 

If changes and amendments are made to the terms and conditions of a contract between the Principal Debtor and the Creditor without the consent of the Surety, a contract of continuing guarantee is revoked. The Surety is released from its liability for transactions that occur after the variations are made. 

In the case of Bishwanath Agarwal vs. State Bank of India, Surety executed a continuing guarantee for a loan amount and interest payable by the Principal Debtor to the creditor. The Debtor defaulted on the loan and additional overdrafts were allowed beyond the specified limit in the same loan account without the Surety’s consent. The court held that Surety was only liable up to the agreed amount and was not bound by the additional overdrafts allowed by the bank without their consent.

Conclusion

Continuing Guarantee is a significant concept in contract law that extends beyond a single transaction or debt. It provides assurance to creditors by holding the Surety liable for a series and multitude of transactions with the Principal Debtor. Unlike a Specific Guarantee that applies to a specific transaction or debt and terminates upon its completion, a Continuing Guarantee persists even after the discharge of a single obligation.

The Surety’s liability in a Continuing Guarantee is co-extensive with that of the Principal Debtor, unless specified otherwise in the contract. The Surety remains liable for any future transactions or debts that may arise between the Creditor and the Principal Debtor. However, Surety can revoke the guarantee for future transactions by giving notice or within the limitations mentioned in the contract.


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